Co-ops Feel Backlash

Ken Haggerty

Sat, 1999-05-01 12:00

The sparks are flying in Alan Hoefling's farrowing barn. Between groups of farrowing sows, Hoefling is making repairs on some crate supports. Alone in his barn, with the mask down and the welder glowing, Hoefling has plenty of time to think about the sparks that were flying at his local cooperative the previous night.The previous night, the Marcus, IA, producer introduced a petition at a local update

The sparks are flying in Alan Hoefling's farrowing barn. Between groups of farrowing sows, Hoefling is making repairs on some crate supports. Alone in his barn, with the mask down and the welder glowing, Hoefling has plenty of time to think about the sparks that were flying at his local cooperative the previous night.

The previous night, the Marcus, IA, producer introduced a petition at a local update meeting of the First Cooperative Association. The petition asked that the cooperative set up policies prohibiting it from being involved in production agriculture.

Working with Land O'Lakes Inc., First Cooperative ended up contract feeding 24,000 hogs last year, losing about $700,000 through January.

"I think the co-op has gone beyond their original mission to supply low-cost inputs and add value to our products through marketing," says Hoefling.

"Right now it's only contracting hogs, but where's the next step? Contracting farmers to milk co-op owned cows? Renting land so they can get enough high-oil corn for their feed mill?" asks Hoefling.

The hog market debacle has brought the anti-co-op sentiments bubbling to the surface. At the Iowa Pork Producers Association annual meeting in January, delegates passed a resolution supporting legislation that would allow co-op members to withdraw their capital from a co-op that engages in, or invests in, production of hogs. In a move to strike out at Farmland Industries Inc., the resolution also included an amendment to repeal the exemption given to co-ops from the Iowa law that prohibits packers from feeding hogs.

A similar resolution was passed during the Four-State Farm Price Crisis Forum, a meeting organized to try and coordinate legislative efforts in Minnesota, South Dakota, Iowa and Nebraska. The anger with co-ops among some producers throughout Iowa and Minnesota is so strong that one regional co-op feed salesman says he considers removing his jacket bearing the co-op's logo before entering some rural cafes.

The Iowa resolution that passed was similar to one first introduced in 1995, explains Linus Solberg, president of the Palo Alto County Pork Producers. "It was defeated by an 80 - 20 margin," he says. "This year it probably passed by 80-20, if not 90-10."

Solberg is in the heart of Farmland-backed hog expansion. He's been fighting the trends of large, integrated farms throughout the last decade.

"We can't compete against a co-op that has a favorable tax status, access to Bank of Cooperatives' government guaranteed money, plus my equity," says Solberg. "They say that their members are demanding it. There may be some (that are), but there's also all kinds of members demanding they get out."

It's a tough situation for the local cooperatives and the two regional co-ops, says Larry Kallem, director of the Iowa Institute for Cooperatives. He points out the overlying dilemma. There are farmers in the local co-op trade areas who want to contract finish hogs. And, there are plenty of integrators (Cargill, Murphy Family Farms, Iowa Select) looking for contract growers. Co-op managers have to ask, "If the farmer contracts with someone besides the local co-op, will the feed business stay local?"

There are also farmers looking for single-source feeder pigs in large groups. Plenty of competing feed companies are willing to supply those groups and, again, the feed.

And, there is a need for the local co-op elevator to try and add value to member grain farmers' corn. Hog production is the most proven value-added market for corn in that area.

Member Driven Needs Farmland and Land O'Lakes both say they only responded to these member-driven needs in setting up their pork producing networks, noting that even now the demand for single-source, high-health, quality feeder pigs in large groups from producers and member co-ops far outstrips their supply. And, they explain, this shortage exists despite Farmland's interest in close to 50,000 sows through a network of contracted production with individual producers and Alliance Farms. Alliance Farms is a separate cooperative Farmland and producer investors formed to produce feeder pigs.

"We are looking for ways to help the farm families who are members of Farmland to continue to participate and compete in this industry," states Wayne Snyder, Farmland vice president of pork production. "Recognize, though, that their needs are pretty varied. A program that fits very nicely for one group or one segment of our membership may not fit for another. The alternatives that our production sector has to their co-ops gives an answer to those who might disagree with some of those programs we have built.

"When an individual says, 'I feel my co-op, by its behavior, is not serving my interest,' he is also saying 'my co-op has chosen to serve another of my members in a way I would choose they not do.' It's not an environment for pleasant decisions to be made but the commitment to the well-being of our members has never changed," he asserts.

Snyder says Farmland stopped expansion last July and has merely stayed with its existing commitments. "No new commitments were allowed after July to deal with this over capacity issue," says Snyder.

Land O'Lakes has interests in over 70,000 sows and new construction will put that total at 90,000 by the end of the year. Land O'Lakes owns the sow and nursery farms and then sells feeder pigs to producer members through local cooperatives. The Aligned System was put on pause last August, according to Terry Nagel, Land O'Lakes corporate communications director. "We're completing the projects we had underway, fulfilling the requests and demands from existing members for feeder pigs," says Nagel.

The Aligned System has nine units complete and operating with seven more in various stages of development, according to Nagel. Units are generally 2,600 sows but some are larger.

Losses in the pork production division at Land O'Lakes for 1998 were in excess of $26 million, and they anticipate similar losses again in '99, says Nagel.

In the midst of this controversy, Land O'Lakes President and CEO Jack Gherty recently reaffirmed the co-ops commitment to building a producer-owned alternative to large-scale integrators. At Land O'Lakes' annual meeting, Gherty asserted that the Aligned System is vital to the future of family farm hog operations and the feed assets and business of its local cooperative members. He maintains that over the long term, Land O'Lakes will leverage system volume in hogs into marketing alliances that will enable them to add further value to member production.

Nagel acknowledges concern from producers who say, "We really don't like what you're doing in the business. We think what you're doing is inappropriate and we're not going to do business with you as a result of this." But he classifies the number of producers with that view as a handful and says, in terms of dollars or real impact, "they're truly negligible."

No Consensus Built One of the most vocal critic of the role Land O'Lakes, Farmland and local co-ops have assumed in the pork industry has arguably been David Kruse, Spencer, IA. Kruse has become something of a lightning rod in the upper Midwest for the highly charged backlash against co-ops involved in hog production. Kruse, a commodity trading adviser, is president of CommStock Investments, a commodity brokerage business. His newsletter, the CommStock Report and exposure on radio, DTN and the Internet, serve as a platform for him to hear producer comments and voice his views.

In February, Kruse recounts, he took a trip from his farm to the Land O'Lakes swine division office in Fort Dodge, IA. The trip brought back memories for Kruse and the three independent producers and members of the Everly, IA, co-op he traveled with.

"The last time we were at Land O'Lakes Fort Dodge facility was 20 years or so ago to learn about co-ops at their young farmer meetings when we were starting in the hog business," says Kruse.

But this trip was to meet with Land O'Lakes officials, to air their views on the co-op's swine production involvement.

For his part, Kruse thinks Land O'Lakes made a grave mistake by not building a consensus among its broad membership before entering the production side of agriculture. "If they had tried to do so, this hog operation would not exist. Members would have told them to get out of production agriculture and get into packing or processing. They undersell the LOL brand, this whole move towards vertical integration is being built on brand names and Land O'Lakes has a foot in the door."

Land O' Lakes officials maintain that market research indicates the brand name would not transfer well into the meat case.